Applause and derision greeted the news that the European Union had won the 2012 Nobel peace prize, with British Eurosceptics dismissing the award as a "farce" and EU leaders rapturously welcoming a boost to the bloc's sagging self-esteem.

The Nobel committee in Oslo chose to ignore the multiple crises threatening the EU. Instead, it took the longer and bigger view, praising the EU's historical role in promoting reconciliation and peace, and warning its collapse would see an ominous return to "extremism and nationalism".

Announcing the decision, Thorbjørn Jagland, head of the Nobel committee, said: "The main message is that we need to keep in mind what we have achieved on this continent, and not let the continent go into disintegration again." The alternative was "awful wars", he warned bluntly.

The award brought an overjoyed reaction at EU headquarters in Brussels. "The EU is the biggest peacemaking institution ever created in human history," said Herman Van Rompuy, the president of the European council, who chairs EU summits. The award was "the strongest possible recognition of the deep political motives behind our union", he said.

José Manuel Barroso, head of the European commission, tweeted that the prize had been awarded to all 500 million EU citizens. "At its origins, the European Union brought together nations emerging from the ruins of devastating world wars – which originated on this continent – and united them in a project for peace," he said. He added that the EU had reunited a continent "split by the cold war" around common values.

But EU critics reacted with scorn. Ukip leader Nigel Farage said: "This goes to show that the Norwegians really do have a sense of humour. The EU may be getting the booby prize for peace because it sure hasn't created prosperity. The EU has created poverty and unemployment for millions."

Martin Callanan, the Tories' leader in the European parliament, said: "The Nobel peace prize was devalued when it was given to newly elected Barack Obama. By giving the prize to the EU, the Nobel committee has undermined the excellent work of the other deserving winners of this prize. Twenty years ago this prize would have been sycophantic but maybe more justified. Today, it is downright out of touch."

The government, unenthusiastic about the European project, made no comment on the prize. Lord Lamont, the former chancellor, however, called it "ridiculous, preposterous and absurd" at a time when people in the streets of Athens "are dressing up as Nazis".

There was astonishment from some in Greece. Panos Skourletis, spokesman for Syriza, the main opposition party, said: "This decision cheapens the prize and more importantly harms the institution of the Nobel peace award. I just cannot understand what the reasoning would be behind it. In many parts of Europe, but especially in Greece, we are experiencing what really is a war situation on a daily basis albeit a war that has not been formally declared. There is nothing peaceful about it."

Speaking in Oslo, however, Jagland reeled off the EU's achievements. He said a conflict between France and Germany was "unthinkable" after 70 years as postwar allies. He cited the EU's successful expansion in the 1980s, which saw the rightwing dictatorships of southern Europe (Greece, Portugal and Spain) become democracies. He also praised the inclusion of the former communist regimes of eastern Europe after the Berlin Wall came down.

He said the EU had played a key role in Balkan reconciliation. "Ethnically based national conflicts have been settled," he declared. Croatia would join the EU next year, Montenegro was opening membership negotiations and Serbia had candidate status, he said. The EU had also "advanced democracy and human rights" in Turkey, he suggested, overlooking the fact that Turkey's membership application has dragged on inconclusively for decades.

Jagland admitted that the 27-member bloc was not in great shape, wracked by its worst crisis of confidence. He said: "The EU is currently undergoing grave economic difficulties and considerable social unrest." But he stressed: "The Norwegian Nobel committee wishes to focus on what it sees as the EU's most important result: the successful struggle for peace and reconciliation and for democracy and human rights. The stabilising part played by the EU has helped to transform most of Europe from a continent of war to a continent of peace."

The Dutch Eurosceptic Geert Wilders was unimpressed, saying: "Nobel prize for the EU. At a time Brussels and all of Europe is collapsing in misery. What next? An Oscar for Van Rompuy?"

Jean-Luc Mélenchon, leader of France's far-left Front de Gauche, called the award an example of "black humour".

Le Parisien newspaper said the Nobel "comes at a time when European unity is being greatly tested. The eurozone crisis has put difficulties of solidarity between states worried about protecting their interests, in the spotlight. The rich economies of the north are dragging their feet over coming to the aid of southern countries financially strangled by public debt and suffering severe austerity cures."

Jagland defended the committee's seemingly counter-intuitive decision. He spoke repeatedly of the EU's policy of integration towards former Yugoslavia, the scene of bloodbaths just 20 years ago: "We have to keep in mind that not so many years ago people from this part of Europe killed each other in awful wars … We are only focusing on what we have achieved on this continent and what could happen if disintegration starts again."

Slovenia is already a member and Croatia is slated to become the EU's 28th member next year. The praise for the Balkan policy came despite the EU's failures to stop the bloodshed in Bosnia in 1992-95.

In a further paradox, given the emphasis on the EU's prowess at reconciliation, the current six-month presidency is held by Cyprus, a country whose intractable conflict and partition has defied decades of mediation and has contributed hugely to the freeze in Turkey's negotiations to join the EU.

Jagland said the Nobel committee, made up of members from non-EU Norway, was not trying "to save the euro" or attempting to dig Europe out of its current hole. Asked what citizens from Greece, Spain and Ireland would make of its unanimous decision, he said most people from these countries still supported the EU: "I think this historic empathy still remains in the heads of so many Europeans. They don't want to lose what has been achieved. Many may criticise the current policy but that is a different matter."

Jagland said it was up to "EU institutions" to decide who would pick up the gold medal and give a lecture at the ceremony in Oslo on 10 December. One candidate is the former German chancellor Helmut Kohl, though he is in poor health. He said: "The Nobel peace prize for the EU is above all a confirmation of the European peace project."

Additional reporting by Helena Smith in Athens and Kim Willsher in Paris